How Work Impacts Social Security Benefits

US News

Many people need or want to work during the traditional retirement years. Working during your 60s can have a dramatic impact on how much Social Security income you'll receive. Here's a look at how working after age 62 will impact the size of your Social Security payments:

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Work without claiming. Retired workers can begin collecting Social Security benefits at age 62. But your Social Security checks are reduced if you claim before your full retirement age. For Americans born between 1943 and 1954, the full retirement age is 66. The full retirement age gradually increases for those born after that, eventually reaching 67 for Americans born in 1960 and later. If you claim benefits before your full retirement age, your benefits will be reduced by up to 30 percent, depending on how early you claim. After your full retirement age, you can increase your check by 8 percent annually by delaying claiming up until age 70.

Consider income limits. You don't have to be retired to claim your Social Security payments. But if you continue to work and earn too much, some or all of your payments could be temporarily withheld. Workers under their full retirement age can earn up to $14,160 without penalty in 2010. After that, 50 cents of every dollar you earn will be deducted from your Social Security checks. The year you reach your full retirement age, the earnings limit climbs to $37,680 and the penalty is reduced to 33 cents withheld from each dollar you earn above the limit. After you reach your full retirement age, there is no penalty for working and claiming your benefits at the same time. "I usually discourage clients from taking Social Security while they are working unless it is a $1,000-a-month type of job," says Ray LeVitre, a certified financial planner for Net Worth Advisory Group in Sandy, Utah, and author of "20 Retirement Decisions You Need To Make Right Now." Wages, self-employment income, sick or vacation pay, and bonuses count toward the earnings cap, while pensions, annuities, interest, dividends, and capital gains do not.

Benefits are not permanently withheld. The money deducted from your Social Security payments if you earn too much isn't withheld forever. Once you reach your full retirement age, your checks are recalculated to give you credit for the reduced benefits. Consider a 62-year-old worker who claims $800 a month in Social Security benefits and earns $22,160 annually from working until age 66. He would have $4,000, or five months' worth of benefits, withheld from his Social Security checks over the course of the year because of the earnings limit. When he reaches age 66, his full retirement age, his monthly benefit amount will increase to $895 to give him credit for the 20 months of withheld benefits. However, if the same worker had waited until age 66 to sign up, his monthly benefit amount would have grown to $1,076. "It's somewhat more advantageous to simply delay claiming, but the impact depends on your earnings level," says Andrew Eschtruth, a spokesperson for the Center for Retirement Research at Boston College

Further boost your benefits. Social Security benefits are calculated based on your 35 highest years of earnings. If one of your highest earnings years happens after you sign up, your payments will be automatically increased the following year. "Your earnings post-retirement, if they are higher than the lowest year in your calculation, can result in an increase in the benefit amount," says Stanley Tomkiel III, an attorney in Scarsdale, N.Y., and author of "The Social Security Answer Book."

Claim spousal benefits while working. Spouses are entitled to Social Security payments of up to 50 percent of the higher earner's check if that amount is higher than the benefit based on his or her own earnings. Married couples who both work can claim each of these payments at different times. Duel-earner couples who have reached their full retirement age can claim a spousal payment and then switch to payments based on their own work record later, which will then be higher due to delayed claiming. For example, a married woman planning to retire at age 70 could claim a spousal payment based on her husband's earnings at age 66 and then claim again based on her own earnings when she leaves her job at age 70. "You can get four years of spousal benefits during a period when you were anticipating getting nothing, while still building up the delayed retirement credits," says Eschtruth.

Suspend payments. Some workers claim Social Security benefits after a job loss or trial retirement, but later decide to go back to work. There is no penalty for working and claiming Social Security benefits at the same time after your full retirement age. But there is another option to boost your Social Security payouts. Those over full retirement age can voluntarily suspend Social Security payments, which will allow you to earn delayed retirement credits and permanently increase future monthly benefits.

Taxes on benefits. You may have to pay federal income taxes on your Social Security benefits if you earn too much. If your adjusted gross income, nontaxable interest, and half of your Social Security payments add up to more than $34,000 ($44,000 for couples) in 2010, you many have to pay federal income taxes on up to 85 percent of your Social Security benefits. If that sum adds up to between $25,000 and $34,000 and ($32,000 and $44,000 for couples) this year, you could be taxed on up to half of your entitlement checks.

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